Essays on the Impact of Economic Freedom on Investment, Entrepreneurship, and Development by Gonzalo Macera M.S. A Dissertation In Agricultural and Applied Economics Submitted to the Graduate Faculty of Texas Tech University in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY Approved Benjamin Powell Co-Chair of Committee Eduardo Segarra Co-Chair of Committee Jamie Bologna Pavlik Jaime Malaga Mark Sheridan Dean of the Graduate School December 2020 Copyright 2020, Gonzalo Macera Texas Tech University, Gonzalo Macera, December 2020 ACKNOWLEDGMENTS Writing a dissertation was a challenging but rewarding experience. Certainly I could not have done it in solitude. Comments, criticism, and guidance have been central. Even though an exhaustive list of those who helped is not technically possible, I will try to acknowledge as many as possible. Some may go unmentioned, but they are not unappreciated. I must begin by thanking Benjamin Powell. Because of him I came to Texas Tech in the first place, and he gave me a chance to undertake this project by offering me a fellowship at the Free Market Institute. He also made it possible for me to finish this by now and get beyond all the difficulties that arose along the way. I also want to thank, along with Ben, the other members of the dissertation committee, Eduardo Segarra, Jamie Bologna Pavlik and Jaime Malaga. Their support, feedback, and comments were essential. I must thank all of the people of the Free Market Institute. Adam Martin, Robert Murphy, Alex Salter, Kevin Grier, Andrew Young, Robin Grier and all other faculty gave me feedback and advice when I requested it, and they helped me a lot by giving me their opinion on how to navigate the path ahead at each stage. To my fellow PhD students, Ray March, Audrey Redford, Glenn Furton, and Edwar Escalante, who all gave me a hand with their comments and suggestions whenever I needed them, thanks. As for the other peers I met in the department, Chandra Dhakal, Eric Asare, Maryam Almasifard, Ted Woolsey, and Ethan Sabala, we together took various courses and participated in seminars, always with great camaraderie. The Department of Agricultural and Applied Economics was always very supportive in my research effort. Benaissa Chidmi and Chenggang Wang were always willing to give me a hand when I consulted them. The dissertation also couldn’t have ii Texas Tech University, Gonzalo Macera, December 2020 come to fruition if it weren’t for the support of Phil Johnson and DeeAnn Pruitt in navigating the administrative process. My thanks also to the Institute for Humane Studies, which has provided me with financial and academic resources and organized events that have been of great help in working on my ideas. Nor can I stop thanking Ed Stringham and the folks at the American Institute for Economic Research for their help. The institute hosted me on a couple of occasions during the time I was working on my dissertation. The academic and financial support, the numerous talks with Max Gulker and Phil Magness, and the atmosphere of camaraderie were important. Nicolas Cachanosky, not only an outstanding academic but a lifetime friend, this would not have happened without you. Thank you. Countless others deserve a thank-you for their encouragement and support. Alex Padilla, you have always provided me with feedback and support and friendship. Vincent Geloso, you’ve been there always as well; thank you. I also must mention my professors back in Buenos Aires, Martin Krause, Juan Carlos Benitez, and Patricia Bonatti, who taught me and then gave me the chance to work with them at the university as a teacher. And to Harry David, a great editor that makes sense of my words when my non-native English gets in the way of clearly expressing the points I want to make, thank you. And last but foremost, perhaps, there are my parents, without whom this would never have happened had they not encouraged me from my earliest days to improve myself in each stage of life and studies. I tragically lost you both in the middle of my time at Texas Tech and I still can’t fully process it. Wherever you are, and until we meet again, God willing, I thank you and miss you. iii Texas Tech University, Gonzalo Macera, December 2020 TABLE OF CONTENTS ACKNOWLEDGMENTS ........................................................................................... ii ABSTRACT .................................................................................................................. v LIST OF TABLES ..................................................................................................... vii LIST OF FIGURES .................................................................................................. viii I. ECONOMIC CALCULATION AND THE PRODUCTIVITY OF INVESTMENT ............................................................................................................. 1 Introduction ................................................................................................................ 1 Economic Calculation and the Creation of Capital .................................................... 3 Economic Freedom and the Productivity of Investment ............................................ 6 Conclusion ............................................................................................................... 12 II. INFLATION AND BANKRUPTCIES ............................................................... 13 Introduction .............................................................................................................. 13 Entrepreneurship and interventionism ..................................................................... 15 Entrepreneurship and market distortions .......................................................................... 15 Cantillon effects and financial approaches ....................................................................... 17 Data .......................................................................................................................... 19 Model ....................................................................................................................... 22 Empirical results ................................................................................................................ 22 Conclusion ............................................................................................................... 26 III. THE 2001 DEBT DEFAULT: A SYNTHETIC-CONTROL ANALYSIS OF ARGENTINA’S CRISIS ........................................................................................... 28 Introduction .............................................................................................................. 28 The 2001 Crisis and the Path Change ...................................................................... 30 The Pre-2001 Period and the Path to the Crisis ............................................................... 30 The 2001 Postcrisis Scenario and Subsequent Policy Change ....................................... 32 Synthetic Control Method ........................................................................................ 35 Control countries ............................................................................................................... 36 Synthetic Control on GDP per Capita ............................................................................... 36 Synthetic Control on Poverty ............................................................................................ 43 Conclusions .............................................................................................................. 48 BIBLIOGRAPHY ...................................................................................................... 50 APPENDIX A ............................................................................................................. 56 iv Texas Tech University, Gonzalo Macera, December 2020 ABSTRACT This dissertation, on the impact of economic freedom on investment, entrepreneurship, and development, attempts to evaluate the effects of different types of economic shocks. The first essay undertakes a theoretical analysis of the effect institutional quality has on the productivity of investments. The second essay looks at the effect of an inflationary shock on entrepreneurial activity. The third essay is a case study that analyzes an economic and institutional crisis followed by an economic policy shock. One of the purposes of this research is to provide a better understanding of the dynamics of these shocks and their ultimate impact on individuals and communities. Institutions are essential because they generate outcomes in their interaction with politics. My analysis goes from the theoretical to the practical, assessing the different implications of the changes generated by modifying sets of institutions. The first essay engages in a theoretical analysis building on previous empirical studies to analyze why an institutional change generates differences in the level and productivity of investments. It explains why institutional quality impacts the productivity of investments. The existing empirical literature finds that a given level of investment creates more economic growth in more economically free countries. Drawing on insights from Austrian economics, particularly as it pertains to the economic-calculation debate and associated knowledge problems, this essay provides a theoretical explanation for why entrepreneurs can